EFFECT OF WTO LAW IN THE EU AND THE INDIVIDUAL S RIGHT TO DAMAGES CAUSED BY A BREACH OF WTO LAW

CYELP 8 [2012] 531-560 531 EFFECT OF WTO LAW IN THE EU AND THE INDIVIDUAL S RIGHT TO DAMAGES CAUSED BY A BREACH OF WTO LAW Ivana ŽiviËnjak * Summary: The question of the legal status and effect of WTO law within the EU legal order is a controversial issue. For years the ECJ has firmly held the position that due to its nature and structure the WTO Agreement is not capable of having direct effect and does not in principle form part of the European courts legality review. At the same time, there are also fierce debates among scholars about what kind of effect WTO law should have in the EU legal order. This paper analyses what kind of impact granting direct effect to the WTO Agreement would have on EU institutions and the EU in general, whether this could harm the EU and if there are some negative consequences, would the benefits arising outweigh the costs. Consideration is ultimately given to whether the WTO Agreement should be granted direct effect. Further, the paper analyses the possibilities for individuals to obtain compensation for damage caused by a breach of WTO law and stresses the need to increase the current level of judicial protection for individuals who have suffered great damage as incidental victims affected by retaliation resulting from a WTO dispute. Finally, given the present circumstances of the WTO system, the most appropriate solution to these issues is offered. 1. Introduction The question of the legal status and effect of WTO law within the EU legal order is a controversial issue. For years there have been fierce debates among scholars, and various opinions have been given about what kind of effect WTO law has and should have in the EU legal order. The idea of granting direct effect to the WTO Agreement 1 has both its advocates and bitter opponents and there are also supporters of some kind of middle ground. The issue of the direct effect of the WTO Agreement is relevant because, as the EU is bound by WTO law, traders count in their international operations on the rights granted to them under the WTO * Trainee lawyer. I wish to express my deep gratitude to my mentor Prof Dr Tamara Perišin for her support and guidance during the final year of my studies at the Faculty of Law, University of Zagreb, as well as in the writing of this paper. 1 Agreement Establishing the World Trade Organization (WTO), Marrakesh, 15 April 1994.

532 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. and in the case of a breach of WTO law perpetrated by the EU, due to a lack of direct effect, they cannot protect their interests before the courts. They are thus prevented from the enforcement of rights to which they consider they are entitled. An especially burning issue is the situation where traders suffer damage as victims of retaliation which is a consequence of the EU s delay in complying with WTO law after inconsistency has been found with its measures. In this paper an attempt will be made to answer questions about whether the WTO Agreement should be granted direct effect and whether individuals can obtain compensation for damage caused by a breach of WTO law. Therefore, the analysis will consider basic principles, fundamental provisions and findings of the Court of Justice of the European Union concerning the relationship of EU law and international law in general. It is also necessary to analyse the Court of Justice s reasoning in answering the above questions. Is not granting direct effect to the WTO Agreement really justifiable and the right thing to do? Could giving direct effect to WTO law harm the EU? Consideration will also be given to the current level of judicial protection for individuals. The analysis will examine the arguments for and against granting direct effect. The intention is to decide whether this would be an acceptable solution for individuals who have been damaged and for the EU in general, or whether some other solution should be found. In this paper, a solution that seems most appropriate given the present circumstances of the WTO system will be offered. 2. Defining the grounds The term direct effect was first used by the European Court of Justice (ECJ) when it attributed to specific Treaty articles the legal quality of direct effect in the van Gend en Loos case 2 in 1963. It applies to those aspects of EU law that are enforceable directly by EU citizens in their own Member State, regardless of whether the Member State has introduced specific national laws to implement the provisions. In essence, it permits individual citizens to enforce the legal rights conferred on them by EU law entirely independent of national law. So, we can say that direct effect is here to make life easier for individual citizens. In van Gend en Loos, the ECJ identified three conditions necessary to establish the direct effect of primary EU law. 3 The first is that the provision must 2 Case 26/62 NV Algemene Transporten Expeditie Onderneming van Gend en Loos v Nederlandse Administratie der Belastingen [1963] ECR 1. 3 ibid, para 12.

CYELP 8 [2012] 531-560 533 be sufficiently clear and precisely stated. 4 Second, it must be unconditional and not dependent on any other legal provision. 5 And third, it must confer a specific right upon which a citizen can base a claim. 6 Over the years, the jurisprudence of the ECJ has established a number of tests in order to determine whether a provision is capable of direct effect and these initial conditions have been broadened and loosened. In 1963, only the Treaty provisions could have the legal quality of direct effect, but nowadays this applies in principle to all binding EU law, including EU Treaties, secondary legislation (regulations, directives and decisions) and, in certain cases, international agreements. In answering the question whether the WTO Agreement is capable of direct effect, one should bear in mind that this legal quality was developed in relation to EU law and that international agreements have a slightly different status. So, before dealing further with the question of the direct effect of WTO law in the European legal order, it is necessary to analyse the grounds - the basic principles, fundamental provisions and findings of the ECJ - upon which further analysis can be built. Thus, we shall give a brief outline of how the ECJ handles the invocability of international agreements 7 in general before taking into consideration how the World Trade Organization itself oversees the application of its law. Next, we shall identify the general consequences of not complying with WTO provisions, and then explain why the question of the direct effect of WTO law is even relevant. 2.1. Invocability of international agreements in general The European Treaties do not determine the relationship between EU law and international law in a detailed manner. In the Treaty on the 4 ibid. 5 ibid. 6 ibid. 7 There is academic and judicial uncertainty about the exact meaning of the terms direct effect, invocability of international agreements and direct applicability. See Paul Craig and Gráinne de Búrca, EU LAW: Lex, Cases and Material (OUP 2008) 269. It has to be mentioned that the ECJ has used these concepts without any legal distinction. In this paper, however, these concepts are distinguished: invocability is a concept wider than direct effect; it implies the ability of a legal subject to rely on the provision of an international agreement. If an international agreement is invocable, it can be used as a criterion for the legality review of Union acts. Direct effect is thus a sub-category of invocability and it has meaning only in relation to individuals. See Rass Holdgaard, External Relations Law of the European Community: Legal Reasoning and Legal Discourses (Kluwer Law International 2008) 244; Case C-149/96 Portugal v Council [1999] ECR I-8395, Opinion of AG Saggio, para 18. Direct applicability implies that no Union act is necessary for an international agreement to become part of EU law. See Alina Kaczorowska, European Union Law (Routledge-Cavendish 2008) 297; Jan Winter, Direct Applicability and Direct Effect: Two Distinct and Different Concepts in Community Law (1972) 9 CML Rev 425.

534 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. Functioning of the European Union (TFEU) 8 there are very few provisions on international agreements. The fundamental provision determining that relationship is article 216(2) TFEU (ex article 300(7) TEC). Pursuant to this provision, agreements concluded by the EU are binding upon the institutions of the EU and upon its Member States. From this, the ECJ drew the conclusion that once it has entered into force an international agreement forms an integral part of the Union s legal order. 9 In addition, from the wording of article 218(11) TFEU (ex Article 300(6) TEC), 10 the hierarchical position of international agreements in the EU legal order can be concluded. The article indicates that they do not prevail over EU primary law, so the logical conclusion is that they rank between primary and secondary law. This has been confirmed by the ECJ - first implicitly 11 and eventually explicitly. 12 By looking at these provisions, one can easily conclude that the provisions of international agreements must be obeyed. So, if the infringement of an international agreement by Union secondary legislation occurs, this could be a ground for finding acts of the institutions invalid, although things are little more complicated than this. Treaties remain silent on the effects of international law in the EU legal order or on how international law should enter the EU legal order. In the absence of legislative regulation, it is up to the ECJ to determine the relationship between international and EU law. To analyse the relationship between international law and EU law we can analogously apply principles that govern the relationship between international law and domestic law. 13 This relationship can be governed in two ways: a state can choose between monism and dualism. Under monism, international law becomes part of the national legal order without formal transformation. Under dualism, international law has to be formally transformed into domestic law. Monism can be seen as favouring international law, while dualism protects the sovereignty of the state. In assessing the relationship between international and EU law, the ECJ has applied both monism and dualism, ie different international agreements have different 8 Consolidated version of the Treaty on the Functioning of the European Union [2008] OJ C115 of 9 May 2008 (hereinafter TFEU). 9 Case 181/73 Haegeman [1974] ECR 449 para 5; Case 104/81 Hauptzollamt Mainz/Kupferberg [1982] ECR 3641, paras 11-14 (hereinafter Kupferberg). 10 Art 218(11) TFEU (ex art 300(6) TEC). A Member State, the European Parliament, the Council or the Commission may obtain the opinion of the Court of Justice as to whether an agreement envisaged is compatible with the Treaties. Where the opinion of the Court is adverse, the agreement envisaged may not enter into force unless it is amended or the Treaties are revised. 11 Case 40/72 Schrőeder KG v Germany [1973] ECR 125, para 13. 12 Case C-344/04 International Air Transport Association and European Low Fares Airline Association v Department for Transport [2006] ERC I-403, para 35. 13 See John H Jackson, Status of Treaties in Domestic Legal Systems: A Policy Analysis 86(2) American Journal of International Law 310.

CYELP 8 [2012] 531-560 535 legal status in the EU legal order. 14 Whether an individual can invoke an international agreement before a national court or the ECJ to question the validity of Union secondary law depends on whether that agreement has direct effect. If the issue of direct effect is not settled within the agreement, the task of determining whether the agreement has direct effect lies with the ECJ. 15 In the Kupferberg judgment, 16 the ECJ examined the direct effect of a provision of the Free Trade Agreement concluded between the European Economic Community and Portugal. The ECJ first established that it can rule on such a matter only if the effect of the agreement in the internal legal order of the parties is not settled in the agreement itself. 17 Then it examined the intention of the parties and concluded that they had not intended to preclude the agreement from having direct effect. After that, the ECJ applied its two-tier approach: first, it analysed whether the invoked provision was unconditional and sufficiently clear to have direct effect; 18 and secondly, it analysed the wording, purpose and nature of the agreement in its entirety in order to determine whether the overall agreement contradicted the findings on the direct effect of the specific provision. 19 The ECJ concluded that the provision had direct effect. An important fact that must be kept in mind is that in Kupferberg no Community measure had been challenged. With the granting of direct effect to the Free Trade Agreement, the scope of Community law was expanded! In Demirel, the ECJ clarified the conditions for direct effect from its Kupferberg judgment by stating: A provision in an agreement concluded by the Community with nonmember countries must be regarded as being directly applicable when, in regard to its wording and the purpose and nature of the agreement itself, the provision contains a clear and precise obligation which is not subject, in its implementation or effects, to the adoption of any subsequent measure. 20 So, it can be seen that the test of direct effect of international agreements is much stricter than the test of direct effect for EU law in general. The ECJ has so far granted direct effect to several provisions of bilateral agreements which were, in the eyes of the Court, clearly designed to 14 See below, in particular part 3. 15 See Cases 21 to 24/72 International Fruit Company [1972] ECR 1219, para 19 and Kupferberg (n 9) para 17. 16 Kupferberg (n 9). 17 ibid, para 17. 18 ibid, para 23. 19 ibid, para 23. 20 Case 12/86 Demirel v Stadt Schwaebisch Gmund [1987] ECR 3719, para 14.

536 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. grant rights to individuals. 21 As regards the WTO Agreement, the current view of the ECJ is that the WTO Agreement does not satisfy the conditions for direct effect. 22 Generally, there are four procedural routes available for individuals to invoke an international agreement, including the WTO Agreement, before the ECJ. The first remedy is an action for annulment under article 263 TFEU (ex Article 230 TEC) according to which an individual may request the ECJ to review the legality of an act of Union institutions if the act is of direct and individual concern to them. If the ECJ finds the measure to be unlawful, that measure will be annulled. The second remedy is an action for failure to act under article 265 TFEU (ex article 232 TEC) against inaction by the EU institutions if an individual can establish that the EU institution has failed to address to him any act other than a recommendation or an opinion. The third remedy is an action for damages under article 340(2) TFEU (ex article 288(2) TEC) which states: In the case of non-contractual liability, the Union shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by its institutions or by its servants in the performance of their duties. And fourth, an alternative route for individuals to invoke an international agreement before the ECJ is to raise the question of the validity of acts of Union institutions before the national court which will then, under article 267 TFEU (ex article 234 TEC), request the ECJ to give a preliminary ruling on that subject. In article 263 TFEU, it is stated that the ECJ shall review legality on grounds of lack of competence, infringement of an essential procedural requirement, infringement of the Treaties or of any rule of law relating to their application, or misuse of powers. According to article 265 TFEU, the ECJ shall establish if there was an infringement of the Treaties. As regards article 340(2) TFEU, it must be established what the general principles common to the laws of the Member States are. It seems that, in order to obtain compensation from the Union, one of the key requirements is that the damage must be a consequence of an unlawful act, but it should be mentioned that there are some national laws on non-contractual liability which allow individuals to obtain compensation even in the absence of unlawful ac- 21 For example, art 2(1) Yaounde Convention 1963 (Case 87/75 Bresciani [1976] ECR 129); art 21(1) EEC - Portugal Free Trade Agreement (Case 104/81 Hauptzollamt Mainz v CA Kupferberg & Cie KG aa [1982] ECR 3641); art 6 EEC - Sweden Agreement (Case C-163/90 Administration des douanes et droits indirects v Legros [1992] ECR I-4625); art 18(1) EEC - Austria Free Trade Agreement (Case C-312/91 Metalsa Srl v Italy [1993] ECR I-3751). 22 See part 3 below.

CYELP 8 [2012] 531-560 537 tion. 23 So, according to these provisions of the TFEU, individuals who seek to invoke the provisions of the WTO Agreement may benefit from these four procedural routes only if (apart from the requirement of direct effect) the WTO Agreement is among the rules in the light of which the ECJ reviews the legality of acts of the Union institutions. Pursuant to current ECJ case law, WTO law does not in principle form part of the European courts legality review, 24 so these procedural routes can have no positive outcome for individuals (or any other applicant). It seems that the ECJ s conclusion that once it has entered into force, an international agreement forms an integral part of the Union s legal order 25 is without legal relevance. 2.2. A view from the WTO standpoint According to article XVI (4) of the Agreement establishing the World Trade Organization (WTO) with respect to national law, each Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements. At first sight, this provision seems to be formulated quite weakly, but if we take into consideration provisions of general public international law we can conclude that this provision is formulated much more strictly than is required under general international law provisions. Article 26 of the Vienna Convention on the Law of Treaties (VCLT) 26 headed Pacta sunt servanda prescribes that every treaty in force is binding upon the parties to it and must be performed by them in good faith. Article 27 VCLT 27 entitled Internal law and observance of treaties lays down that a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. While these general rules only mention performing a treaty in good faith and the inability to justify non-performance by internal law, article XVI (4) WTO lays down for member states the obligation of having their legal order in conformity with the WTO provisions. Still, this article cannot compel domestic courts to review the legality of national law with regard to the WTO provisions and it especially cannot compel them to do so at the request of an individual. This depends only on the preference of the member state. Most of the WTO member states, among whom are the United States, Canada, Japan and China - some of the major players in the world trade system - did not grant WTO law direct effect in their 23 See Christian von Bar, Non-Contractual Liability Arising out of Damage Caused to Another (Principles of European Law, vol 7, OUP and Staempfli Publishers 2009). 24 See part 3 below. 25 Haegeman (n 9); Kupferberg (n 9). 26 Vienna Convention on the Law of Treaties (VCLT), Vienna, 23 May 1969. 27 VCLT (n 26).

538 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. legal order and are not fond of such an idea. 28 Even the WTO panel has explicitly established that WTO law does not have direct effect and stated that it would be more convenient to speak of the principle of indirect effect. 29 Thus, the only consequence for a WTO member state (which has not granted WTO law direct effect) for not having its legal order in conformity with WTO law lies within the organisation. A member state which considers itself to be damaged by a breach of WTO law perpetrated by another member state may initiate a dispute settlement procedure provided in the Understanding on the Rules and Procedures Governing the Settlement of Disputes in the World Trade Organization (DSU). 30 Here, we have to emphasise that individuals have no access to this procedure. The procedure is formally initiated by a request of the complaining member state for consultations where the aim is to achieve a mutually agreed solution. If a mutually agreed solution is not achieved, the complaining party may request the establishment of a panel. The panel will submit its findings in the form of a written report to the Dispute Settlement Body (DSB). If the panel establishes that there was a breach of WTO law, a report shall include a recommendation for the respondent party to bring its measure into conformity with the relevant WTO agreement. The report must be adopted by the DSB which can decide not to adopt the report only by consensus. This kind of procedure is called reverse consensus. If there is no appeal by the parties, the respondent party has to implement the adopted recommendation or ruling of the DSB. If immediate compliance is not possible, a reasonable period of time is given to the respondent party which then has to comply after the expiry of the implementation period. The procedure is the same in the case of an appeal, once the Appellate Body (AB) report has been adopted. If the respondent party fails to bring the measure found to be inconsistent with a relevant WTO agreement into compliance with the recommendations and rulings, the parties shall enter into negotiations to reach an agreement on compensation. If no satisfactory compensation is agreed, the complaining party may request authorisation from the DSB to adopt countermeasures, ie to apply retaliation. Countermeasures have to be applied in the same trade sector and they have to be equivalent to the level of inconsistency of the other party. If the complaining party considers that it is not practicable or effective to suspend concessions in the same trade sector, concessions could be suspended in other sectors 28 Peter Van den Bossche, The Law and Policy of the World Trade Organization: Text, Cases and Materials (CUP 2005) 71-72. 29 United States - Sections 301-310 of the Trade Act of 1974, WT/DS152/R, 22 December 1999, paras 7.78, 7.79. 30 Understanding on Rules and Procedures Governing the Settlement of Disputes in World Trade Organization (DSU) Annex 2 to the Agreement Establishing the World Trade Organization, Marrakesh, 15 April 1994.

CYELP 8 [2012] 531-560 539 under the same WTO agreement. If this is not effective either and if the circumstances are serious enough, concessions could also be suspended under another WTO agreement. However, the fact that concessions are suspended does not end the breach of WTO law. Retaliation is considered only as a temporary measure, until the DSB ruling or recommendation is implemented by the respondent party. 2.3. Where is the problem? According to what has been said above, in the case of a breach of WTO law perpetrated by the EU, the EU de facto has a choice either to comply with primary WTO obligations or to accept retaliation. The logic is that the EU will choose the more favourable and profitable option. And if that means accepting retaliation and retaining its WTO incompatible measure, the EU will retain that measure for as long as it can. So, on the one hand, the EU obtains benefits on the macro level, but on the other hand individuals who are engaged in trade in sectors in which the concessions are suspended bear the consequences for those benefits. Suspending concessions, eg increasing customs duties on exports, causes severe damage to traders. It seems that even greater injustice is done to traders if the countermeasures are not applied in the same trade sector in which the WTO inconsistent measure has been adopted. The concessions in the traders trade sector are suspended because of a dispute between the EU and another WTO member of which they are not even aware and in a trade sector with which they have nothing to do. Consequently, traders find that the EU is responsible for the damage they suffer. After all, the conduct of the EU is the cause of the suspended concessions. Under the general principles, the party who suffers damage because of the conduct of another should be entitled to compensation. But in cases where the damage occurs due to the failure of the EU to comply with the obligations under the WTO Agreement - which is binding on the EU - things are not that simple. The fact that the EU deliberately maintains the WTO inconsistent measure and is fully aware of the consequences of this act is apparently without relevance. Individuals who suffer damage because of a breach of WTO law perpetrated by the EU have no procedural routes to complain about the illegality of the EU legislation and/or to obtain compensation. So they cannot be compensated for the damage they have already suffered and they cannot prevent further damage. Because of the denial of the direct effect of WTO law and because WTO law does not form part of the European courts legality review, individuals cannot benefit from procedural routes which would normally be available to them if this was not a case of a breach of WTO law. 31 It appears that there 31 For four procedural routes available for individuals, see above in part 2.1.

540 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. is a lack of judicial protection for individuals that have found themselves caught in a dispute between the EU and other WTO members. 3. Case law In the course of analysing whether the WTO Agreement should be granted direct effect and what the possibilities are for individuals to obtain compensation for the damage caused by a breach of WTO law, it is essential to examine the case law of the Court of Justice of the European Union. In conformity with the principles of international law, if the question of the effect of the agreement in the internal legal order is not expressly set out within the agreement, it is up to the Court to determine it. 32 Since the ECJ is the body that has the final say on questions of the direct effect of the WTO Agreement and on the individual s right to damages, it is necessary to analyse the ECJ s reasoning in answering these questions. Thus, some of the most significant cases involving these issues are examined below. 3.1. Inception - International Fruit Company In 1972, the International Fruit Company case 33 was the first to raise the question of whether the provisions of the General Agreement on Trade and Tariffs (GATT) 1947 (and nowadays of the WTO Agreement) are capable of having direct effect. Indeed, this is where the whole saga began. It has to be mentioned that the motive to initiate this case was not the dispute between the EEC and other WTO members whose consequence would be retaliation which would damage traders. The traders found the EEC measure to be harmful to them and considered that they would be better off relying on the provision under GATT 1947. Importers of apples complained about the EEC regulation which restricted the importation of apples from third countries. They claimed that the EEC regulation was inconsistent with article XI GATT 1947 which provided for a general prohibition on quantitative trade restrictions. In order to determine whether individuals can invoke article XI GATT 1947 before the courts, the ECJ examined the spirit, the general scheme and the terms of the GATT in general. 34 The Court concluded that the agreement was based on the principle of negotiations undertaken on the basis of reciprocal and mutually advantageous arrangements and that its provisions were highly flexible, in particular with respect to the possibility 32 See International Fruit Company (n 15) para 19 and Kupferberg (n 9) para 17. 33 International Fruit Company (n 15). 34 ibid, paras 19, 20.

CYELP 8 [2012] 531-560 541 of derogation and dispute settlement. 35 Apparently, there was a lack of formalism and prevalence of political application in the GATT 1947. 36 Accordingly, the ECJ concluded that article XI GATT 1947 was not capable of conferring rights on individuals and, consequently, that the validity of the EEC regulation could not be affected by it. 37 In its analysis of the capability of article XI GATT 1947 of having direct effect, the ECJ did not examine this specific provision but concluded merely on the basis of the character of the GATT 1947 as a whole. An important fact to be kept in mind is that in this case the validity of the Community measure was challenged, unlike in the following Kupferberg case 38 where the scope of Community law was, by granting direct effect to the provision of the Free Trade Agreement, expanded, as pointed out above. 39 So, reasonable doubt arises about whether the practical consequences of the decision to grant or not to grant direct effect are the overriding factors which influence the ECJ s stance. Either way, in this case the ECJ laid foundations by setting direct effect as a must have condition for a validity review in the light of international agreements and set the criteria for the test of direct effectiveness of the GATT 1947, and nowadays of the WTO Agreement, which it has since consistently applied in every case questioning the validity of EU measures in the light of the GATT 1947 or the WTO Agreement. On the other hand, the Court has on several occasions reviewed the legality of EU measures in the light of international agreements without first having established whether the international provision in question has direct effect. 40 3.2. Biret On 1 January 1995, the WTO Agreement entered into force and introduced some changes in comparison to the old GATT 1947 which some believed would compel the ECJ to grant direct effect to the new and improved version. It was expected that the ECJ would reassess the arguments given in respect of the capability of the GATT 1947 having direct effect, but the Court did not alter its stance and in each of the following cases it recalled the arguments given in International Fruit Company. 41 35 ibid, para 21. 36 Patrick FJ Macrory, Arthur E Appleton, Michael G Plummer, The World Trade Organization: Legal, Economic and Political Analysis (vol 1, Springer 2005) 1485. 37 International Fruit Company (n 15) paras 27, 28. 38 Kupferberg (n 9). 39 Regarding Kupferberg, see part 2.1 above. 40 Schröder (n 11) and Case 112/80 Dürbeck v Hauptzollamt Frankfurt am Main-Flughafen [1981] ECR 1095. 41 International Fruit Company (n 15).

542 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. One of these cases was Biret. 42 It should also be emphasised that in Biret there was the first occurrence of the question about whether a DSB decision was capable of having direct effect. Biret International and Établissements Biret were two French companies involved in trade in various agri-foodstuffs, in particular meat. The companies had allegedly suffered great damage after the Community adopted directives 43 on the prohibition of the importation into the Community of beef and veal from farm animals to which certain substances with hormonal action had been administered. In the meantime, there was a dispute within the WTO initiated by the US and Canada 44 who argued that the EC prohibition of the importation of hormone-treated meat was in breach of the SPS Agreement, 45 and WTO inconsistency was found by the DSB. Biret, as well as the US and Canada, were displeased with those Community measures so they brought an action for damages under article 340 TFEU (ex article 288 TEC) before the Court of First Instance (CFI) (now the General Court (GC)), 46 and after the unfavourable judgment of the CFI, brought an Appeal to the ECJ. 47 They sought compensation for the damage they had allegedly suffered as a result of the adoption and continuation in force of directives which prohibited the importation into the Community of hormone-treated meat. The Biret companies were relying on the existence of a WTO decision which determined WTO inconsistency and demanded compliance with WTO obligations and since the EC had failed to implement the DSB decision, they considered that there had indeed been unlawful conduct by the EC institutions which gave rise to their right to compensation. The ECJ reiterated the conditions for the non-contractual liability of the Community, which were the illegality of the conduct of the Community institutions, actual damage and the existence of a causal link between the conduct 42 Cases C-93/02 and C-94/02 P Biret International/Établissements Biret v Council [2003] ECR I-10497. 43 Council Directive 81/602/EEC of 31 July 1981 concerning the prohibition of certain substances having a hormonal action and of any substances having a thyrostatic action [1981] OJ L222; Council Directive 88/146/EEC of 7 March 1988 prohibiting the use in livestock farming of certain substances having a hormonal action [1988] OJ L70; Council Directive 96/22/EC of 29 April 1996 concerning the prohibition on the use in stockfarming of certain substances having a hormonal or thyrostatic action and of ß-agonists, and repealing Directives 81/602/EEC, 88/146/EEC and 88/299/EEC [1996] OJ, L125. 44 See European Communities - Measures Concerning Meat and Meat Products (Hormones), Report of the Appellate Body, WT/DS26/AB/R, WT/DS48/AB/R, 16 January 1998. 45 Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), part of annex 1A to the Agreement Establishing the World Trade Organization, Marrakesh, 15 April 1994. 46 Case T-174/00 Biret International v Council [2002] ECR II-17 and Case T-210/00 Établissements Biret v Council [2002] ECR II-47. 47 Biret (n 42).

CYELP 8 [2012] 531-560 543 of the institution and the damage. 48 The ECJ then confirmed the words of the CFI by stating that given their nature and structure, the WTO agreements are not in principle among the rules in the light of which the Court is to review the legality of measures adopted by the Community institutions. 49 So, according to the ECJ, the mere provisions of the WTO Agreement have no effect on the legality of the institutions conduct, but it did not say the same for the DSB decision. By not defining the effect of a DSB decision, the ECJ left open the possibility that the question, about whether an individual could obtain compensation on the basis of the non-contractual liability of the EU when there was a DSB decision identifying a breach of WTO law perpetrated by the EU institutions, when the EU had failed to implement a decision and when the implementation period had expired, might in the future be answered in the positive. 3.3. Van Parys However, the above question was very quickly answered in the negative. The possibility vanished with the Van Parys judgment 50 where the ECJ determined the effect of the DSB decision in the EU legal order after the expiry of the implementation period. Although not determined in the context of an action for damages, the arguments that the ECJ gave here about the effect of a DSB decision have been consistently applied in all the following cases where the question of the effect of a DSB decision has been raised, irrespective of the type of action. The Van Parys case is one of the ECJ cases which arose as a consequence of the WTO s long-lasting banana dispute which started because of the EU s overlapping international obligations. When the Agreement Establishing the World Trade Organization entered into force in 1995, the Regulation on the common organisation of the market in bananas was in force in the European Community. 51 This Regulation contained preferential provisions for bananas from certain African, Caribbean and Pacific (ACP) states in accordance with the Fourth ACP-EEC Convention. 52 Several WTO members, including the US, dissatisfied with such provisions, initiated a dispute settlement under the WTO, and the DSB established that certain provisions of the EC Regulation were incompatible with articles I and XIII of the General Agreement on Tariffs and Trade (GATT) 48 ibid, para 51. 49 ibid, para 52. 50 Case C-377/02 Van Parys v Belgisch Interventie- en Restitutiebureau (BIRB) [2005] ECR I-1465. 51 Council Regulation (EEC) 404/93 of 13 February 1993 on the common organization of the market in bananas [1993] OJ L47/1. 52 Fourth ACP-EEC Convention signed at Lome on 15 December 1989 [1991] OJ L229/3.

544 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. 1994. 53 As the EC did not remove the infringement of WTO law, on the US s request, the DSB authorised the US to suspend concessions under the GATT 1994 and to levy customs duties in respect of trade originating in the Community amounting to up to USD 191.4 million per year. 54 Van Parys found himself in the middle of this dispute as a trader importing bananas into the Community. He brought an action against the Belgian Intervention and Refund Board (BIRB) because of BIRB s refusal to issue him with import licences for certain quantities of bananas originating in Ecuador and Panama. Van Parys challenged the validity of the EC s Regulations 55 on the common organisation of the market in bananas in the light of articles I and XIII of the GATT 1994. He claimed that BIRB s decision was unlawful because it was based on the EC Regulations which were themselves unlawful because of their inconsistency with the WTO Agreement. However, the ECJ repeated the old answer that WTO law does not in principle form part of European courts legality review. 56 As regards the effect of the DSB decision after the expiry of the implementation period, the ECJ concluded that even where there is a decision of the DSB holding that the measures adopted by a member are incompatible with the WTO rules, the WTO dispute settlement system nevertheless accords considerable importance to negotiation between the parties. 57 The ECJ continued several paragraphs later: The expiry of that time-limit does not imply that the Community had exhausted the possibilities under the understanding of finding a solution to the dispute between it and the other parties. In those circumstances, to require the Community Courts, merely on the basis that that time-limit has expired, to review the lawfulness of the Community measures concerned in the light of the WTO rules, could have the effect of undermining the Community s position in its attempt to reach a mutually acceptable solution to the dispute in conformity with those rules. 58 So, the Court expressly stated that the DSB decision, as well as primary WTO law, cannot be a criterion for the legality of EU measures. As an additional argument for not taking into consideration WTO law and 53 General Agreement on Tariffs and Trade (GATT), part of annex 1A to the Agreement Establishing the World Trade Organization, Marrakesh, 15 April 1994. 54 European Communities - Regime for the Importation, Sale and Distribution of Bananas (EC - Bananas III) WT/DSB/M/59. 55 Council Regulation (EC) 1637/98 of 20 July 1998 amending Regulation 404/93 on the common organization of the market in bananas [1998] OJ L210/28. 56 Van Parys (n 50) paras 38, 39. 57 ibid, para 42. 58 ibid, para 51.

CYELP 8 [2012] 531-560 545 the DSB decision in reviewing the validity of EU law, the ECJ reiterated its reciprocity argument, emphasising that: some of the most important commercial partners of the Community have concluded that they are not among the rules applicable by their courts when reviewing the legality of their rules of domestic law. Such lack of reciprocity would risk introducing an anomaly in the application of the WTO rules. 59 So, as regards the validity of the EU measures in the light of the WTO Agreements, the existence of a DSB decision identifying a breach of WTO law, even after the expiry of the implementation period, makes no difference in the eyes of the Court. 3.4. FIAMM and Fedon The FIAMM and Fedon case 60 is at the core of the present case-law analysis as the most recent and most interesting one. It is the final word of the Court, for now, on the capability of substantive WTO provisions and of DSB decisions having direct effect and also on the possibility for individuals to obtain compensation on the grounds of incompatibility with WTO law. The case is also interesting because there was the first occurrence of the question about whether compensation could be obtained on grounds of non-contractual liability in the absence of unlawful conduct in the context of the EU s international obligations under the WTO. It appears that the applicants anticipated that the Court would not change its opinion on finding that there was unlawfulness in the institutions conduct and wanted to circumvent that condition by claiming compensation for the lawful conduct of the institutions. FIAMM and Fedon was also one of the bananas dispute cases. As mentioned in the context of Van Parys, because of the inconsistency of the EC regulation on the common organisation of the market in bananas with WTO law, even after the expiry of the implementation period granted by the DSB, the US was authorised to levy customs duties in respect of trade originating in the Community amounting up to USD 191.4 million per year. 61 The US did not apply these retaliatory measures in the same trade sector, ie in the bananas trade sector, but increased customs duties on import of batteries, spectacle cases, paper boxes, bed linen, bath prod- 59 ibid, para 53. 60 Joined cases C-120/06 P and 121/06 P Fabbrica italiana accumulatori motocarri Montecchio SpA (FIAMM), Fedon & Figli and others v Council and Commission [2008] ECR I-6513. 61 See about EC - Bananas dispute in part 3.3 above.

546 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. ucts, handbags, wallets, coffee makers, etc. 62 Such retaliation did not affect the EC directly but severely damaged many European companies and individuals - traders importing those products into the US. Consequently, the traders considered the EC to be responsible for the damage they suffered and six actions for damages 63 were brought before the Court of First Instance (CFI) from March 2000 to June 2001. The CFI delivered six judgments on 14 December 2005, all worded in a similar way, and rejecting all the claims as unfounded. 64 Among these were the FIAMM case 65 and the Fedon case 66 which involved the greatest damage, amounting in FIAMM to EUR 10.8 million and in Fedon to EUR 2.3 million. 3.4.1. Judgment of the CFI 67 The applicants sought compensation under Article 288(2) TEC (now Article 340(2) TFEU) on the Community s non-contractual liability, on several grounds; firstly, they claimed that there was unlawful conduct by the EC institutions which breached WTO law and also the general principles of EC law by not bringing the EC legislation into conformity with the WTO agreements within the time limit laid down by the DSB. 68 Secondly, and alternatively, the applicants sought compensation on the grounds of the non-contractual liability that had incurred even in the absence of unlawful conduct. 69 As regards the liability of the Community for the unlawful conduct of its institutions, the CFI reiterated three conditions that must be satisfied in order to obtain compensation and stated that there were no grounds for finding unlawfulness of conduct. 70 The CFI supported this stance with several standard arguments, namely the fact that some 62 See Notice of the United States Trade Representative (USTR), Federal Register, vol 64, issue 74 19209 (19 April 1999). 63 Cases T-69/00 FIAMM and FIAMM Technologies v Council and Commission [2005] ECR II-5393; T-151/00 Le Laboratoire du Bain v Council and Commission [2005] ECR II-23; T- 301/00 Groupe Fremaux SA and Palais Royal Inc v Council and Commission [2005] ECR II-25; T-320/00 CD Cartondruck AD v Council and Commission [2005] ECR II-27; T-383/00 Beamglow Ltd v EP, Council and Commission [2005] ECR II-5459; T-135/01 Giorgio Fedon & Figli SpA, Fedon Srl and Fedon America USA Inc v Council and Commission [2005] ECR II-29. 64 FIAMM (n 63); Le Laboratoire du Bain (n 63); Groupe Fremaux and Palais Royal (n 63); Cartondruck (n 63); Beamglow (n 63); Fedon (n 63). 65 FIAMM (n 63). 66 Fedon (n 63). 67 As regards the judgment of the CFI, for the sake of clarity, only the paragraphs from the FIAMM case are cited. 68 FIAMM (n 63) paras 69, 84, 92-95. 69 ibid, para 84. 70 ibid, paras 85, 108-110, 113.

CYELP 8 [2012] 531-560 547 of the most important commercial partners of the Community did not grant the WTO Agreement direct effect, ie the reciprocity argument, the importance of negotiations and the possibility of depriving the legislative or executive organs of the Community of the scope for manoeuvre. 71 The applicants claim that the DSB decision met all the conditions for direct effect 72 was also declared as unfounded because, according to the CFI, even after the expiry of the implementation period, considerable importance is still accorded to negotiation, and the methods for settling disputes made available by the DSU had not been exhausted. Therefore, in such a case there was also the possibility of depriving the legislative or executive organs of the Community of the scope for manoeuvre. 73 The applicants also claimed that, by not bringing the EC legislation into conformity with the WTO agreements within the time limit laid down by the DSB, the EC institutions were not only in breach of WTO law but also in breach of certain fundamental principles of Community law, including the principles of the protection of legitimate expectations and of legal certainty, the principles of the right to property and the pursuit of an economic activity, and the principle of proper administration. 74 The CFI did not enter into a detailed analysis concerning whether those principles were in fact breached, but gave a simple answer that all the complaints rest on the premise that the conduct of which the defendant institutions are accused is contrary to WTO rules. 75 Consequently, since there was no unlawful conduct of the EC institutions, the CFI dismissed the applicants claim for compensation grounded on the non-contractual liability of the Community for unlawful conduct. 76 As regards the applicants alternative claim, the liability of the Community in the absence of unlawful conduct of its institutions, the CFI confirmed the possibility that the Community may incur non-contractual liability even for its lawful acts. 77 The CFI referred to the ECJ De Boer Buizen judgment 78 and stated that: Where, as in the present case, it has not been established that conduct attributed to the Community institutions is unlawful, that does not mean that undertakings which, as a category of economic operators, are required to bear a disproportionate part of the burden 71 ibid, paras 111, 112. 72 ibid, para 100. 73 ibid, paras 125, 129-131. 74 ibid, paras 92-95. 75 ibid, para 146. 76 ibid, paras 149, 150. 77 ibid, paras 157, 158, 160. 78 Case 81/86 De Boer Buizen v Council and Commission [1987] ECR 3677.

548 Ivana ÆiviËnjak: Effect of WTO Law in the EU and the individual s right to Damages Caused.. resulting from a restriction of access to export markets can in no circumstances obtain compensation by virtue of the Community s non-contractual liability. 79 The CFI pointed out that the general principles common to the laws of the Member States within the meaning of article 288(2) TEC (now article 340(2) TFEU) include not only liability for unlawful acts since national laws, in certain cases, allow individuals to obtain compensation even in the absence of unlawful action by the perpetrator of the damage. 80 The CFI then reiterated the conditions that must be satisfied in order for the Community to incur non-contractual liability in the absence of unlawful conduct, which the ECJ had put forward in its Dorsch judgment, 81 namely the occurrence of actual damage, the causal link between that damage and the conduct of the Community institution and the unusual and special nature of the damage. 82 In its course of analysis, the CFI concluded that the conditions of actual and certain damage and of direct causal link were satisfied. 83 It concluded that there was a sufficiently direct causal nexus between the conduct of the Community institutions and the damage, irrespective of the fact that the increased customs duty was imposed by the unilateral decision of the United States. 84 As for the unusual and special nature of the damage suffered, the CFI recalled its previous case law, considering the damage to be unusual when it exceeds the limits of the economic risks inherent in operating in the sector concerned and special when it affects a particular circle of economic operators in a disproportionate manner by comparison with other operators. 85 The CFI did not consider the damage which occurred to the traders in batteries as a consequence of the dispute over bananas to be unusual. 86 On the contrary, it considered it to be the risk inherent in traders export operations and stated that: The possibility of tariff concessions being suspended as provided for by the WTO agreements is among the vicissitudes inherent in the current system of international trade. Accordingly, the risk of this vicissitude has to be borne by every operator who decides to sell his products on the market of one of the WTO members [especially since] it is clear from the DSU, which was publicised appropriately 79 FIAMM (n 63) para 157. 80 ibid, paras 158, 159. 81 Case C-237/98 P Dorsch Consult v Council and Commission [2000] ECR I-4549. 82 FIAMM (n 63) para 160. 83 ibid, paras 170, 191. 84 ibid, para 184. 85 ibid, para 202. 86 ibid, paras 203, 211.